“Corporate sales decelerated along with continued decline in profits and could adversely impact investments ahead.

“In this situation,crowding-in of private investment demand by public investment spending stimulus while aggressively cutting expenditure on subsidies hold the key to growth revival,” the RBI said in Macroeconomic and Monetary Developments report.

Citing that low investments cannot be attributed to high interest rates only,the RBI said in the pre-crisis period investments were high even as interest rates remained at elevated level.

It said sustained fall in investment has impacted India’s growth potential and there is a need to improve the investment climate by “moving quickly” to address bottlenecksin infrastructure space and removing constraints on foreign direct investment (FDI).

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India’s economic growth fell to a nine-year low of 6.5 per cent in 2011-12 after clocking over 8 per cent GDP growth for three consecutive fiscals.

Government has been unable to raise FDI cap in insurance and pension sector to 49 per cent from 26 per cent and also open the multi-brand retail sector to foreign players because of opposition from its coalition partners.

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RBI further said it was not possible for the government to provide any fiscal sops to the industry as was given at the time of 2008 crisis.

Pointing out that high deficit could further impact weak private investment demand,RBI said,”it is critical to return to a credible and durable fiscal consolidation path.

“As such,fiscal space would need to be created by controlling revenue expenditure to provide more resources for capital expenditure which could crowd-in private investment,” the apex bank said.

It said there was a need for curtailing subsidies and the government should take “steps to allow pass-through of international crude oil prices to domestic prices,failing which it would be difficult to achieve the deficit target”.

Fiscal deficit,which is the gap between the revenue and expenditure,had ballooned to 5.76 per cent in 2011-12,from 4.9 per cent a year ago. The government targets to bring it down to 5.1 per cent in the current fiscal.

RBI said the budgeted petroleum subsidy of Rs 43,500 crore for the current fiscal “appears inadequate”.

Rate cut unlikely as RBI sees more risks on inflation front

Mumbai: The Reserve Bank today hinted at holding on to its elevated rates in the quarterly monetary policy review tomorrow,saying there are increased risks on inflation scenario and lack of action on the fiscal front.

“Monetary policy space needs to be created through fiscal adjustment and structural measures to improve supply conditions …” the Reserve Bank said in its report on Macroeconomic and Monetary Developments,released on the eve of the policy announcement.

The near-term outlook on inflation is marked by a slew of upside risks despite significant slowdown in growth,the RBI said,adding that suppressed inflation,poor supply responses and a weaker monsoon are risks to price-situation.

“Persistence of inflation,even as growth is slowing has emerged as major challenge for monetary policy,” it said.

For the month of June,the headline or WPI inflation stood at 7.25 per cent while the consumer price index was at double-digit level of 10.02 per cent.

The pro-growth lobby,which is alarmed over quarterly growth slipping to a nine-year low of 5.3 per cent for the March quarter,wants the RBI to slash interest rate to prop-up growth.

In its last review of June 16,the RBI had refrained to cut policy rate despite hard lobbying by industry to ease policy rate.

RBI also said that the growth in the current fiscal is likely to be below the reduced potential of 7.5 per cent because of “global headwinds,inflation and policy uncertainty”.

RBI noted that monetary and liquidity conditions have eased and are not significantly impinging on growth.

Interestingly,policy uncertainty,a favourite phrase with the corporates and investor class,also found favour with the RBI for the first time.

“Revival of investor confidence would need to be supported by addressing concerns over policy stasis,while putting in place complimentary actions that address macro-economic weaknesses,” the RBI report said.

A study of professional forecasters done by RBI revealed that growth will slip to 6.5 per cent for the fiscal against RBI’s projection of 7.3 per cent. For inflation,forecasters upped their expectations to 7.3 per cent from the earlier 6.9 per cent by fiscal-end.

RBI said high prices of protein items,which it cites as the main factor of driving inflation in the last two years of high growth,are unlikely to wear-off even if the growth slips.

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For the Centre,RBI said there is an urgent need to control expenditure. “Removing constraints on FDI and improving the investment climate by moving quickly to address bottlenecks in infrastructure space are important,” it said.

It also noted that due to fiscal imbalances,the Centre’s space for stimulus is limited compared to 2008-09 when the government moved in quickly with stimulus packages.

On the movement of monsoon,RBI said the deficiencies can have an adverse impact on food inflation.